Pick an adjective, none of them quite describe the volatility and turmoil we saw in the oil and equity markets in January.

What I can say is that the first 2 weeks of the month saw the largest percentage decline to start a new year in history. And, while we finally had a couple of positive days towards the end of the month, punctuated by a nice rally the final trading day, it still did not stop the bleeding. U.S. large caps were down over 10% at mid-month, with small and mid-caps faring much worse. In fact, we saw levels we haven’t seen since before January of 2014! And, as I type this, it appears the markets are cruising down almost another 2% to start February.

What is happening here? What does this mean for us?

What we are witnessing is a combination of a few things.

First, an oversupply of oil and no cut back in production has caused oil futures to rapidly decline even further from their already low points in December. Swings of 4-5% daily were not uncommon in January.

Second, earnings have not been overly positive. Yes, a few companies have done well, but more and more are reporting lowered earnings, revenue and revenue forecasts. In fact, so far this year, the number of companies whose executives have mentioned recession concerns to analysts and investors is up 33 percent from the same period a year ago; the first such increase since 2009 (Source: Yahoo! Finance February 2, 2016).

Third, a drastic slowdown in China has had a rippling effect throughout the global economy. Economic data kept pouring in that did not meet expectations and signaled to all that the world’s 2nd largest economy was going through difficult times.

Finally, what we have been discussing and warning about for some time now appears to be showing itself: The effect of the Fed’s market manipulation via stimulus programs and low interest rates. Understand, the Fed has been hinting of raising interest rates for almost 3 years now, but had yet to...until December of 2015. They also eliminated the last stimulus program in October of 2015. It is obvious they want OUT of the game, but haven’t quite known how to proceed. Now, they have played their hand, and it has so far been terrible for all markets. It has been our contention that nothing was truly fixed from the 2008 debacle; instead, we put a band aid on the problems in the form of the Fed’s QE programs coupled with the continued lowering of interest rates. Good for the markets, but bad for savers, retirees dependent on interest from their investments to live, and the middle and lower classes who don’t participate much in the markets.

Now that we understand some, not all, of the issues currently facing us and causing the tumult in the markets, what can we do about it?

First, the key is not to panic and let emotion rule investment decisions. We still had our stops in place in the beginning of January, and while we didn’t have a crystal ball telling us beforehand what was about to happen, we did stop out in our model portfolio early in January, limiting the damage we saw the rest of the month. At this moment, the trend lines are definitely bearish, so it is our position to hold steady with an increased cash position along with some gold, and continue to monitor the markets and patiently wait for the trend to reverse itself. If it does not, and things deteriorate further, we feel we are in an adequate protection stance. We can always lighten up even more if necessary, but only in an extreme circumstance do we want to be completely out of the markets.

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(1)The S&P 500 Index is representative of domestic markets and includes the average performance of 500 widely held common stocks. Individuals cannot invest directly in any index and unlike investments; the S&P 500 Index does not incur management fees, charges, or expenses. (2) All Statistical information, investment category determinations, and economic data retrieved from www.bloomberg.com. Past performance is no guarantee of future results and all investment strategies involve the risk of financial loss.

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